After much anticipation, on July 10, 2013, the SEC finally adopted amendments to permit general solicitation and general advertising in offerings conducted pursuant to Rule 506 of Regulation D and Rule 144A. In addition, the SEC adopted amendments to disqualify securities offerings involving certain felons and other bad actors from reliance on Rule 506. In conjunction, the SEC also proposed amendments to Regulation D, Form D, and Rule 156 in an effort to add investor safeguards, enhance the information available from the private placement market, and monitor how general solicitation impacts that market. Below we provide a summary of the significant aspects of the adopted and proposed amendments.
In accordance with Section 201(a) of the Jumpstart Our Business Startups Act, on August 29, 2012, the SEC proposed amendments to lift the ban on general solicitation and general advertising in Rule 506 and Rule 144A offerings. For a summary of the proposals, please see our client alert dated August 31, 2012. For the most part, the SEC adopted the amendments as proposed. Accordingly, the adopted amendments:
- Create a new Rule 506(c) that permits general solicitation and advertising in Rule 506(c) offerings, provided that
- all terms and conditions of Rule 501 and Rules 502(a) and 502(d) are satisfied,
- all purchasers are reasonably believed to be “accredited investors,” as defined in Rule 501 of Regulation D, and
- the issuer takes reasonable steps (as discussed below) to verify that all purchasers are accredited investors;
- Allow securities to be offered pursuant to Rule 144A to persons other than “Qualified Institutional Buyers” as defined in Rule 144A (“QIBs”), including by means of general solicitation, provided that the securities are only sold to persons that the seller, and any person acting on behalf of the seller, reasonably believes to be QIBs; and
- Revise Form D to require the issuer to check a box if it is relying on Rule 506(c). Because they will engage in public advertising, issuers relying on Rule 506(c) will not be able to fall back on the Section 4(a)(2) exemption under the Securities Act. Securities sold pursuant to Rule 506(c), however, will be “covered securities,” exempt from state registration requirements. Moreover, Rule 506(b) remains as a separate exemption, and issuers may choose to rely on Rule 506(b), without any general solicitation, if the issuer wants to sell to non-accredited investors and/or avoid the Rule 506(c) verification requirements.
Reasonable Steps. Whether the steps taken to verify accredited investor status are “reasonable” will require an objective determination by the issuer, in the context of the particular facts and circumstances of each purchaser and transaction. If, however, an issuer has actual knowledge that the purchaser is an accredited investor, then the issuer will not have to take any steps at all. Regardless, because the issuer has the burden of demonstrating entitlement to the Rule 506(c) exemption from registration, the issuer should thoroughly document the steps the issuer took to verify the accredited investor status of purchasers.
In determining the verification steps to take, and the reasonableness of its methods, issuers should consider the following:
- the nature of the purchaser and the type of accredited investor that the purchaser claims to be;
- the amount and type of information that the issuer has about the purchaser; and
- the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as the minimum or maximum investment amount.
Issuers may rely on a third party that has verified a person’s status, provided that the issuer has a reasonable basis to rely on such third-party verification. But, the issuer will not have taken the reasonable steps to verify accredited investor status if (absent other indications of such status) the issuer only requires a purchaser to check a box in a questionnaire or sign a form.
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